Chapter 17

• Firm objective


  Create Management compensation plan support strategies objective
• Three objective of management control

  1. Motivate manager exert higher effort to achieve goal
  2. Provide incentives to the manager acting autonomously
  3. Determine fair reward based on EFFORT, SKILLS AND EFFECTIVENESS to decision making
• Cash compensation

  • Granting periodic raise 


  Salary Raise - affected permanent

  Bonus - give flexibility
• Income based compensation - encourage dysfunctional behavior such

  • Postpone needed maintenance
  • Postpone revenue recognition at end year
• Three factors in manager compensation plan

  1. Achievement of organization plan
  2. Ease administering plans
  3. Ensue affected executive perceive plans
• Bonus compensation 


  Fastest growing element and often largest part
• 3 key aspect in categorizing bonus

  Base of compensation - bonus lay determine:

  • Stock price
  • Cost Revenue, profit or investment based performance
  • Balanced scorecard

  Compensation pools - Source which bonus pay is funded. 2 common pools

  • Unit based pool - accord to manager performance
  • Firmwide pool - based on firm 


  Payment Options - How bonus awarded 2 common options

  
  

  • Cash
  • Stock ( OS) - awarded directly or granted in form of stock option

  Both either awarded currently or deferred to future years
• Bonus payment Option


  Current Bonus - most common based on current (C/S)

  Deferred Bonus - Earned currently but not paid for two or more years.

  Stock Option - right to purchase stock at future date in predetermined price

  Performance stock - grant due to certain performance achievement
• Performance measure at individual activity level issue arise in designing performance measure

  1. Activities require multiple task
  2. Activities done in teams
• Performing Task

  Employers want employee to allocate time and effort intelligently on various task or aspect of their job
• Team based advantage

  • Resolve many problems
  • Better securities rather na individual employees
  • Encourage help one another toward common goal
  • Development of team skills
• Team based compensation desirability depend on great extent of culture and management style in an organization
• Criticism in team based compensation

  • Incentives for individual is diminishes and harm overall perfomance
  • Some members that not productive contributors then share in teams reward
• Individual Based Compensation

  Reward based on his own performance and consistency with responsibility accounting
• Environmental and Ethical Responsibility

  • Company should be aware constantly to environmental and Ethical responsibility
  • As manager, should not be tainted to creative accounting
  • As manager, promptly and severely reprimand unethical conduct irrespective on benefit company may accrue
  • Strong underlying system is important in enforcing contract and basis for confidence in dealing ethical issues
  • Social responsible company set very strict environmental goal and measure and report performance against them